Slow crawl, or slither

While tax returns continue to trickle in, last year the FTB reported income tax collections of $5.5 billion in just two days, April 16 and 17.  For tax returns which come in the mail, the board must open the return, verify the tax calculations and deposit the checks.  Talk about a pig in a python!   How can FTB accurately and efficiently move so much tax information and tax dollars through its processing systems?   To give a perspective, if Franchise Tax Board were to process $1,000 of this total in each second starting at midnight on April 15, it would not complete the processing until June 18 at 4:00 PM.  

But, the state does not have the luxury of waiting until mid-summer to deposit its tax checks.  Thankfully, many taxpayers file tax returns electronically, so the electronic filing facilitates verification of returns and payment processing.  FTB also hires many seasonal workers to assist during the peak processing days for those returns filed through the mail.  Without the careful planning and professionalism of FTB staff, the python of tax processing would take much, much longer.

Each month, residents from around the West—from Hawaii, Alaska, Montana, Utah, Oregon, Washington and California--mail their quarterly income tax payments to a post office box in San Francisco.  Typically, these payments come from high-income taxpayers, including payments from software moguls, oil-rig engineers, Hollywood starlets and prairie rustlers.  From the San Francisco PO box, the IRS trucks the letters to Hayward for envelope opening, tax verifying and payment depositing.  What if, during the processing of those checks something really, really bad happened?  Something did on September 11, 2005:  The truck carrying these payments across the San Mateo bridge had a particularly nasty accident.  All 30,000 letters fell into the bay. The IRS recovered about half the letters.   What happened to the other letters?  Like Luca Brasi, 15,000 tax payments sleep with the fishes.  The IRS waived interest and penalties for the taxpayers whose returns remain in the bay.

California Ahead of Projections

Through April 22, the State’s total revenue is at $74.4 billion for the year, which is $3.1 billion ahead of the latest forecasts. With personal income taxes showing a strong start to the day, this trend of strong revenues is likely to continue.

 

Speaking of capital gains:  Statute sometimes allows taxpayers to carry over their capital losses from one year to the next. For the five-year tax period ending in 2011, the latest year for which the Franchise Tax Board reports, the inventory of losses rose from an estimated $64.1 billion to $121.3 billion.

Retail Sales Taxes Trying to Keep Up

April began somewhat on the soggy side in terms of retail sales tax receipts but have picked up during the past week.  Although sales taxes are only expected to account for about 5 percent of California’s total collections from its three primary revenue sources for April, they are projected to comprise about 23 percent of the year for the total fiscal year 2013-14.

Boosted by spending related to Easter, sales tax receipts net of refunds exceeded $200 million during the past week, which was close to the amount that might have been expected.  For the fiscal year to date, retail sales taxes are also running very close to estimates, with a slight negative variance of just 0.5 percent. 

Job and income growth should continue to support consumer spending, but this tax source will need to be monitored closely.

April’s Major Tax Revenues Hit $10.4 Billion

Finalized numbers show that collections for three major revenue sources—personal income, corporate income, and sales taxes—reached $10.4 billion for the month-to-date as of Monday, April 21.  Personal income taxes (PIT) commanded the dominant share at $8.9 billion.  Driven by growth of company payrolls and capital gains, PIT appears to be running about $1.2 billion ahead of estimates so far in April and is about $2.3 billion ahead of estimates for the entire fiscal year-to-date.

Each year, the single biggest source of taxable income can be attributed to wage income.  While its share may vary over time, in the last four years, wages accounted for between 61.3 percent and 67.3 percent of taxable income.   In 2011, for example, and after accounting for data anomalies, FTB reported that wages accounted for 63.5 percent of taxable income. 

California’s Cash Cushion Remains Solid

Buoyed by a relatively good day for personal income tax receipts (PIT) and continued strength on the corporate side, preliminary numbers for April 21 show that California’s total receipts from its three major revenue sources are still exceeding projections by about $2.7 billion.

Monday’s numbers, including weekend dining and spending for Easter, also indicate that retail sales taxes are catching up, with year-to-date receipts only trailing estimates by around $67 million.

The stock market’s performance remains critical to the revenue outcome. Of the capital gains and losses reported in 2011, taxpayers reported stock gains of $29.0 billion. Against these gains, they netted losses of about $15.2 billion. For stocks held less than a year, they reported more losses than gains, showing losses of $5.5 billion and gains of $4.8 billion.  Gains from stocks held longer than a year outstripped losses by $14.5 billion.

 

California No. 1 in Personal Income and 12th in Per Capita Terms

California generated $1.8 trillion in total personal income in 2013, easily surpassing the $1.2 trillion of second place Texas. Adjusted for population size, California’s per capita income was $47,400 last year, ranking it 12th highest in the nation.

Per capita income in Texas ranked a distant 25^th in the nation, although its cost-of-living is significantly lower than that of California. Per capita income in California is about 106% of the national average, which is virtually identical to that of Washington.

California’s per capita personal income rank largely reflects the presence of higher-paying jobs necessary to support the inherent higher cost of land and housing in many parts of the state.

California Looks to Personal Income Growth

California's personal income tax receipts are holding up so far this April despite only moderate growth in personal income during 2013. For April 1-18, 2014, personal income tax receipts (PIT) net of refunds totaled $8.6 billion, according to final figures. This puts the month-to-date total at 80% of the target for the total month, which is essentially identical to the ratio achieved at the same time a year ago.

California’s personal income grew a moderate 2.8% in calendar year 2013 versus a 5.0% gain in 2012. Personal income growth nationally also slowed from 4.2% to 2.6%.
 
Two major forces led to some slowing in income growth last year. First, the two percentage point temporary drop in payroll taxes for Social Security (from 6.2% to 4.2%) that was in effect during 2011 and 2012 ended. Second, individuals tried to shift some income, such as bonus payments, into 2012 before higher federal tax rates went into effect in 2013.  (California’s increase was retroactive to January 1, 2012).

As a result of these changes, wages and salaries net of Social Security taxes rose just 2.1% last year in California. Investment income -- including dividends, interest, and rent – increased by 4.1%. Various transfer payments -- including Social Security, Medicare, veterans’, and unemployment benefits -- also saw a strong 4.0% gain. Overall, last year, California ranked 16th in national income growth and was in the fourth quintile of state
performance.

In addition to growth in the core PIT base, including wages, investment income, and transfer payments, capital gains through the stock and real estate markets are major drivers of PIT.  In his May Revision documentation, many expect the Governor to discuss how much taxable capital gains may add to 2013-14 and 2014-15 revenues. 
 
What makes taxes on capital gains difficult to estimate? There are many reasons, but one important reason is that taxpayers often have discretion about when they “realize” a gain for purposes of taxation. They can defer selling a stock, for example, that has appreciated a year or two, as they manage their investment portfolio. For example, of the $74.7 billion in capital gains reported by taxpayers in 2011, $11.1 billion (15 percent) were from investments held for less than a year. The balance, which could include stocks and real estate, were held for an excess of 12 months. The holding period could be a very long time.  The State’s revenue estimators have a difficult time estimating how much of these holdings have appreciated and when taxpayers might decide to realize their gains.

When trying to anticipate capital gains, revenue estimators must consider investment losses when trying to predict taxable gains, as losses can reduce tax liabilities on investment gains. For example, taxpayers reported capital losses of $25.7 billion in 2011. These losses were used to offset over one-third of the investment gains reported for the tax year.